Chapter 10 Flashcards
(20 cards)
A bond’s annual coupon divided by its par value
Coupon Rate
A bond’s annual coupon divided by its market price
Current Yield
The discount rate that equates a bond’s price with the present value of its future cash flows
Yield to Maturity (YTM)
The price of a bond net of accrued interest; this is the price that is typically quoted
Clean Price
The price of a bond including accrued interest, also known as the full or invoice price
Dirty Price
A bond is callable if the issuer can buy it back before it matures
Callable Bond
The price the issuer of a callable bond must pay to buy it back back
Call Price
The present value of the bond’s remaining cash flows
Make-Whole Call Price
the period during which a callable bond cannot be called
Call Protection Period
Measure of return that assumes a bond will be redeemed at the earliest call date
Yield to Call (YTC)
The possibility that changes in interest rates will result in losses in a bond’s value
Interest Risk Rate
The yield actually earned or “realized” on a bond
Realized Yield
A widely used measure of a bond’s sensitivity to changes in bond yields
Duration
Change in bond price resulting from a change in yield to maturity of one basis point
Dollar Value of an 01
Change in yield to maturity that would lead to a 1/32 change in bond price
Yield Value of a 32nd
A bond portfolio created to prepare for a future cash outlay
Dedicated Portfolio
The uncertainty about the future or target date portfolio value that results form the need to reinvest bond coupons at yields not known in advance
Reinvestment Rate Risk
Constructing a portfolio to minimize the uncertainty surrounding its target date value
Immunization
The risk that bond prices will decrease, which arises in dedicated portfolios when the target date value of a bond or bond portfolio is not known with certainty
Price Risk
Periodic rebalancing of a dedicated bond portfolio to maintain a duration that matches the target maturity date
Dynamic Immunization
